February 15, 2016

ECB, Mario Draghi, before bank regulation distortions are eliminated, should not be allowed to waste any more in QEs

Sir, James Shotter reports that Mario Draghi, “the ECB president, said the central bank would pay close attention to the impact of the recent falls in oil and commodities prices, as well as the ability of banks to pass on the ECB’s monetary policy” “Draghi’s speech hints at further stimulus measures for the Eurozone” February 16.

Mario Draghi, as the former chair of the Financial Stability Board must know that the risk weighted capital requirements for banks, dramatically distorts the allocation of bank credit to the real economy, which impedes banks to pass on efficiently any stimulus measures. And, if Draghi does not yet know that, it’s even worse.

Shotter also refers to Draghi opining that reforms since the financial crisis had boosted the resilience, “not only of individual institutions but also of the financial system as a whole”, and presenting as evidence “that the Eurozone’s banks had boosted their core tier one capital ratios — a key measure of financial strength — from 9 per cent to 13 per cent.”

And Draghi must know that it most surely is the result of banks shedding or swapping assets against which they are required to hold a lot of capital, like loans to SMEs and entrepreneurs, for assets against which they are allowed to hold much less capital. And therefore that strengthening could be absolutely meaningless for banks, or even increase the systemic risk in the banking system; as well as a great source of weakness for the economy. And, if Draghi does not yet know that, it’s even worse.

ECB, Mario Draghi, before bank regulation distortions are eliminated, should not be allowed to waste any more in QEs or other similar stimulus.

One could also ask, how long Europe will stand for having financial authorities that, demonstratively, are not up to the task?

@PerKurowski ©